Before the days of modern medicine, most people died before they needed the modern day equivalent of a nursing home. Many people remember the pre-1960s term, “rest home.”
Through the marvel of modern medical technology, we are living longer lives. However, those last years can be fraught with poor health, and needing extraordinary care.
Thus, the proliferation of what we now know as “nursing homes.” The nursing home industry in its modern incarnation is only about 50 years old. Now, almost every town has at least one nursing home.
Nursing homes, nation-wide, generate billions of dollars a year in revenue. Historically, 85% of residents rely on government assistance (Medicaid) to pay for the exorbitant cost of care. In Massachusetts, the average cost is now $12,000 per month and rising. No wonder many families go broke paying for a nursing home. It’s the number one reason seniors lose their life-time of savings, including their homes…!!!
Never to lose an opportunity, the insurance industry devised a product that could defray all or some of these costs.
Enter long term care insurance. These policies have evolved many times over the years. Legally, most of these policies must even pay for home health care, assisted living, or even light housekeeping duties. Even for older people (70s and 80s), these policies were somewhat affordable and were starting to become a crucial estate planning tool. However, a funny thing happened on the way to the planning forum. The industry completely miscalculated the projected claims experience of these policies.
As a result, premiums started to rise, multiple 30% rate increases were not unheard of and the underwriting became stricter, resulting in these policies becoming more cost prohibitive for older folks to afford policies. Because of these rate increases, the sale of long term care insurance has gone down dramatically. The industry is now in a possible death spiral. Many companies have stopped writing it all together. It is becoming a financial albatross and the losses have gone on unabated. Genworth Financial is a prime example. Per Forbes magazine, the company has lost well in excess of $750 million dollars in their long term care insurance division. This obviously has had a dramatic effect on the viability of the company.
This does not negate the fact that from a planning perspective, the concept is still a wonderful opportunity to protect assets, notwithstanding the affordability issue.
A new product to the rescue?
Enter Life Insurance with a Long Term Care Rider. Life insurance has always been the cornerstone of profits for the insurance industry. In this new product, quite simply, by accelerating the death benefit, one can apportion a percentage of the death benefit to pay for long term care, should one need it. Of course, there is a cost for this rider. However, it is more attractive for a potential policy holder, because the benefits will pay out, some day, no matter what. Since these policies are whole life (permanent) there will always be a benefit, either upon one’s death, or accessible via long term care benefits. Moreover, these policies build up cash which can be accessed during the life of the policy, under certain guidelines.
The downside is the availability of these funds for home health care, assisted living and light housekeeping are not as pervasive as traditional long term care insurance products. It’s present incarnation, life insurance with long term care riders are missing those crucial benefits. That is the downside.
Given the current state of affairs in Medicaid/Estate Planning, the newer policies can have an important place in the planning process. Many families are reluctant to establish Irrevocable Trusts that potentially can save assets, but can be egregiously restrictive. Tools such as a traditional long term care insurance and the newer life insurance with long term care riders are and always will be extremely useful tools that can ad flexibility to a family’s estate plan. Whether or not the new life insurance products supplant the current long term care insurance products all together has yet to be determined. Stay tuned…!